Tuesday, July 17, 2012

HSBC chief quits in front of US Senate committee as bank is accused of 'letting Mexican gangs launder $7 billion and working with Saudi bank linked to terrorism'

The head of compliance at British banking giant HSBC resigned in front of a US Senate subcommittee today after it emerged the bank had exposed the US to billions of dollars worth of money laundering, drug trafficking, and terrorist financing.
David Bagley, who has been HSBC head of group compliance since 2002, stepped down before the Homeland Security and Governmental Affairs subcommittee after its findings were published.
Mr Bagley, who had a 20 year career with the bank and is based in London, said: 'Despite the best efforts and intentions of many dedicated professionals, HSBC has fallen short of our own expectations and the expectations of our regulators.'
Earlier in the hearing, subcommittee chairman Senator Carl Levin said HSBC's compliance culture had been 'pervasively polluted for a long time'.
The revelations are another blow to the reputation of the banking industry following the current scandal over the manipulation of the Libor inter-bank lending rate.
Stepping down: David Bagley quit his post before the Homeland Security and Governmental Affairs subcommittee in Washington today
Stepping down: David Bagley quit his post before the Homeland Security and Governmental Affairs subcommittee in Washington today
An explosive report claims a 'pervasively polluted' culture at HSBC led it to act as financier to clients seeking to route shadowy funds from the world's most dangerous and secretive corners, including Mexico, Iran, the Cayman Islands, Saudi Arabia and Syria.
The Senate probe detailed how sweeping the problems have been, both at the bank and at the Office of the Comptroller of the Currency, a top U.S. bank regulator which the report said failed to properly monitor HSBC.
'The culture at HSBC was pervasively polluted for a long time,' said Senator Carl Levin, chairman of the U.S. Senate Permanent Subcommittee on Investigations, a Congressional watchdog panel.
The report comes at a troubling time for a banking industry reeling from a multi-country probe into the manipulation of global benchmark rates.
Last month, rival British bank Barclays Plc agreed to pay a $453 million fine to settle a U.S.- British probe into the rigging of the benchmark interest rate known as the London interbank offered rate, or Libor.
The Senate probe provides a rare look at how HSBC responded when confronted with numerous cases of suspect money flows.
The report caps a year-long inquiry that included a review of 1.4 million documents and interviews with 75 HSBC officials and bank regulators. It will be the focus of a hearing on Tuesday at which HSBC and OCC officials are scheduled to testify.

HSBC headquarters in the City of London: The bank has been accused of laundering money for the Mexican mob
Powerhouse: HSBC headquarters in the City of London. The bank has been accused of laundering money for the Mexican mob
The bank and the regulator are expected to face tough questions at the hearing about how the abuses were allowed to continue, even after the OCC took regulatory action against HSBC in 2010.
An investigation found persistent lapses in the bank's anti-money laundering compliance since 2010.
In an emailed statement, HSBC said the Senate report had provided 'important lessons for the whole industry in seeking to prevent illicit actors entering the global financial system'.
The bank said it is spending more money on compliance and has become more coordinated in policing high-risk transactions.
Vicious: Mexican gangsters are paraded in a police photo. The country is one of the most crime-ridden places in the world as rival cartels compete to control the lucrative drugs trade
Vicious: Mexican gangsters are paraded in a police photo. The country is one of the most crime-ridden places in the world as rival cartels compete to control the lucrative drugs trade
An HSBC facility in New Castle, Delaware. Executives insist that after years of run-ins with U.S. authorities over alleged anti-money laundering lapses, they have cleared up their act
An HSBC facility in New Castle, Delaware. Executives insist that after years of run-ins with U.S. authorities over alleged anti-money laundering lapses, they have cleared up their act
Several HSBC executives are expected to testify, including the bank's chief legal officer Stuart Levey, who joined in January. He was previously one of the top officials on terrorism and finance at the U.S. Treasury Department.
HSBC plans to 'acknowledge and apologize' for failing to spot and deal with money laundering within the bank during a U.S. Senate panel hearing next week, according to an internal memo sent by its chief executive.
'It is right that we are held accountable and that we take responsibility for fixing what went wrong,' Chief Executive Officer Stuart Gulliver said in a note sent to staff.
The report also contained strong criticism of the OCC, saying the regulator failed to crack down on the bank despite multiple red flags, allowing money laundering issues 'to accumulate into a massive problem'.

HOW HSBC BECAME THE SUBJECT OF A U.S. SENATE INVESTIGATION

Probe: Senator Carl Levin referred HSBC to bank regulators in connection with questionable accounting
Probe: Senator Carl Levin referred HSBC to bank regulators in connection with questionable accounting
The U.S. Senate Permanent Subcommittee on Investigations has been investigating HSBC for months as part of an effort by Congress to probe shadowy money flows.
It began in February this year when U.S. senator Carl Levin said he planned to refer HSBC Holdings to its U.S. bank regulator in connection with questionable accounts it provided for senior Angolan officials.
Senator Levin, who chairs the Permanent Subcommittee on Investigations was particularly scathing about HSBC and the role of a Connecticut office of the bank in providing offshore accounts in the Bahamas nearly a decade ago to the Angolan central bank.
At the time he said: 'They've got some real regulatory problems in terms of their obligation to know their customers here in America.'
Mr Levin said he was not pleased with answers given at a hearing by Wiecher Mandemaker, director of general compliance for HSBC Bank USA. 'I thought his answers were very unsatisfactory.'
Asked to comment about Levin's remarks, HSBC, Europe's largest bank, said it takes compliance matters very seriously.
'HSBC's record demonstrates a commitment to vigorous enforcement and continuous enhancement of anti-money laundering policies and practices'.
A subcommittee report said attempts in 2002 by the then-head of the Angolan central bank, Aguinaldo Jaime, to transfer $50 million in government funds to the United States had been rebuffed by Citigroup (C.N) and Bank of America (BAC.N).
Nonetheless, Levin said at the hearing, London-based HSBC helped the Angolan central bank avoid a British court order freezing some of its assets.
The title of the hearing is 'Vulnerabilities to Money Laundering, Drugs, and Terrorist Financing: HSBC Case History.'


Thomas Curry, who took over as comptroller less than four months ago, said in a statement on Monday that anti-money laundering compliance 'is crucial to our nation's efforts to combat criminal activity and terrorism, and the OCC expects national banks and federal thrifts to have programs in place to effectively comply with these laws'.
Curry said the Senate report had made a number of 'thoughtful' recommendations, 'which we fully embrace'.
The failings and lax controls inside HSBC included an inability to properly monitor $15 billion in bulk cash transactions between mid-2006 and mid-2009, inadequate staffing and high turnover in the bank's compliance units, the report said.
HSBC ignored risks in doing business in countries such as Mexico, a country rife with drug trafficking, it said.
Between 2007 and 2008, HSBC's Mexican operations moved $7 billion into the bank's U.S. operations.
According to the report, both Mexican and U.S. authorities warned HSBC that the amount of money could only have reached such a level if it was tied to illegal narcotics proceeds.
Saudi terror links
terror funding? The probe has examined links between HSBC and the Saudi Arabian Al Rajhi Bank
terror funding? The probe has examined links between HSBC and the Saudi Arabian Al Rajhi Bank
The Senate probe also examined banking HSBC did in Saudi Arabia with Al Rajhi Bank, which the report said has links to financing terrorism.
Evidence of those links emerged after the Sept 11, 2001 attacks on the United States, the Senate report said, citing U.S. government reports, criminal and civil legal proceedings and media reports.
In 2004, Al Rajhi sued the Wall Street Journal, which had published an article about U.S. and Saudi authorities monitoring accounts. The article referenced Al Rajhi.
Al Rajhi said in response to a WSJ story that it 'unequivocally condemns terrorism'. Al Rajhi and the paper settled in 2004.
The paper did not pay damages and stated that it 'did not intend to imply an allegation that (Al Rajhi) supported terrorist activity, or had engaged in the financing of terrorism', the Senate report said.
In 2005, HSBC told its affiliates to no longer do business with the bank, the report said. Four months later, HSBC officials reversed course, allowing affiliates to decide whether to continue to do business with Al Rajhi.
A Middle Eastern unit of HSBC continued doing business with the bank, the report said. HSBC ultimately stopped helping the bank handle certain types of transactions, and HSBC compliance officials rebuffed other HSBC bankers seeking to maintain ties to the bank.
Then in late 2006, Al Rajhi threatened to yank all of its business with HSBC unless it regained access to using HSBC's bulk-cash transaction business, the Senate report said.

HSBC: THE DAMNING FINDINGS

The focus of the Senate probe was HSBC's U.S. operations, which has its main office in New York.
HSBC used the U.S. unit as a selling point to clients outside the United States, touting its ability to handle U.S. dollar transactions.

Among HSBC's problems, the report described the bank's compliance division failed to investigate the suspect money.
High turnover of top compliance officials made it difficult for reform to take hold, the report said. Employees were 'overwhelmed' by a mounting number of suspect transactions that needed review.

'We're strapped and getting behind in investigations,' one bank official wrote in June 2008.
By that time, HSBC was cutting costs to offset losses tied to subprime home loans and the brewing financial crisis.
In 2010, one disgusted top compliance official threw up his hands and quit after less than a year on the job, according to the report.

Typical of the problems inside the bank were transactions tied to Mexico, a country the report said is 'under siege from drug crime, violence and money laundering'.

HSBC, according to the report, helped move money for a Mexican foreign-exchange dealer called Casa de Cambio Puebla that served as a hub for laundered proceeds, according to the report.

Between 2005 and 2007, there was a 'growing flood' of U.S. dollars moving between the exchange house and HSBC, setting off red flags inside HSBC.
Some bankers said the transfers were legal. One said the money came from Mexican landscapers working in the United States and routing money back home to their families.

HSBC ultimately closed the account in November 2007 after it received a seizure warrant from the Mexican attorney general seeking money tied to the exchange dealer, the Senate report said.
HSBC agreed to continue to provide the bank bulk shipments of U.S. dollars until 2010 when HSBC exited entirely the bulk-cash business.
Officials at Al Rajhi could not immediately be reached for comment.

Dealings with Iran

Some of the money that moved through HSBC was tied to Iran, the report said, which would violate U.S. prohibitions on transactions tied to it and other sanctioned countries.
To conceal the transactions, HSBC affiliates used a method called 'stripping,' where references to Iran are deleted from records. HSBC affiliates also characterized the transactions as transfers between banks without disclosing the tie to Iran in what the Senate report called a 'cover payment.'
HSBC 'failed to take decisive action to confront these affiliates and put an end to the conduct,' the report said.
Between 2001 and 2007, more than 28,000 transactions were identified by an outside auditor for HSBC that potentially could have run afoul of laws that prohibit transactions with sanctioned countries.
Of those, 25,000 involved Iran. A smaller number required additional analysis to determine if violations of U.S. regulations had occurred, the report said.
At the heart of HSBC's failings was the fact that it served as a hub for smaller financial firms needing access to the global banking system, the report said.
In one example detailed in the Senate investigation, HSBC continued to do business with one client that admitted to U.S. law enforcement that it had failed to maintain an effective anti-money laundering system.
The client, Sigue Corp, was a money processor in California, the report said. In 2008, the company agreed to a so-called deferred prosecution with the U.S. Justice Department and other U.S. agencies where it admitted to allowing millions of dollars of suspect transactions between 2003 and 2005.
Undercover U.S. officers, in a sting, even moved money through the company, explicitly telling Sigue agents they were moving illegal drug proceeds, the report said.


Read more: http://www.dailymail.co.uk/news/article-2174785/U-S-probe-accuses-HSBC-moving-7-billion-Mexican-drug-money-working-Saudi-Arabian-bank-linked-terrorism.html#ixzz20tvlEQcO