Sigrún Davíðsdóttir's Icelog

Large-scale money laundering – the shocking saga of HSBC

with one comment

This week saw the publication of a report by the US Senate into money laundering, with the HSBC bank as a case study, U.S. Vulnerabilities to Money Laundering, Drugs and Terrorist Finance: HSBC Case History. I’ve been through the report and the stories recounted of individual cases read like drafts for thrillers. As in the FSA and US reports regarding Barclays’ LIBOR rigging the most fascinating read is in the extensive email excerpts – they give a real sense of the tone.

One of the HSBC stories relates to the bank’s US subsidiary, HBUS, and its transaction with a Japanese bank, Hokuriku Bank, known to have a poor ‘Know Your Customer’ information. In less than four years, from 2005-2008, HBUS cleared more than $290 million in bulk U.S. dollar travelers cheques from Hokuriku Bank. The cheques were submitted in large blocks of sequentially numbered cheques of $500 or $1000, signed and countersigned not by two separate signees as required but with the same illegible signature. When HBUS finally made some inquiries as to who might be on the other end, the bank was told the end customers were Russians, dealings in used cars. In  2008 the appropriate US authority, The Office of the Comptroller of the Currency, OCC, pressured HBUS to stop processing the travelers cheques but it wasn’t until this year, when the Senate inquired about this contact, that HBUS finally closed the account – four years after the OCC first tried to push HBUS on the matter.

The HSBC emails give a good sense of the tone, the mentality and the line of thinking within the bank. There is a wealth of interesting information, plenty to chose from, but here are three examples I found striking and very informative as to what went on in the bank, the way of thinking and the conflicting interests within the bank – the conflict between making money and following rules and regulations and the bank’s own compliance officers.

HSBC knew for years that its accounts in Cayman and the bank’s handling of Mexican accounts were a weak line in respect to money laundering. One HSBC banker in Mexico guessed at one point that the bank was laundering 60-70% (!) of the funds of Mexican drug gangs. The quote below, from January 2009 reveals the conflicts here between money laundering measures – and “cheap funding:” (emphasis mine):

Last but not least, I will address the issue of funding. After all, Cayman and Mexican dollar accounts provide us with US$2.6 billion of cheap funding. We are likely to lose a big portion of this if we tell customers we no longer receive dollar notes. We have to provide an alternative to our customers for this: Miami accounts may be an alternative but we will have to talk to HBUS of how we get this ch[eap] funding back to Mexico to lend.”(p. 80)

Sometimes, even simple words can be mistaken for “colourful” language. The following refers to the fact that the bank helped Iranian entities get money in and out of the US in spite of Iran being on a list of countries that US citizens weren’t allowed to do business with:

Later that day, another HBEU official John Ranaldi sent an email to Mr. Geoghegan stating that he was aware of the Iranian situation and would get an update. He wrote: “[B]asically, our interpretation was that we were being asked to ‘fudge’ the nature of the payments to avoid the U.S. embargo and seizure.”834 When asked about this email, Mr. Geoghegan told the Subcommittee that he could not explain what Mr. Ranaldi meant by using the word “fudge,” except that it related to Iran.835 He said that, at the time, he was unaware that HBEU was altering transaction documentation or using cover payments. Having since learned what was going on, he told the Subcommittee that he assumed that’s what Mr. Ranaldi was talking about. When asked whether it raised alarm bells at the time, he remarked that he got many emails and Mr. Ranaldi used colorful language. He said that he also knew Mr. Ranaldi would follow-up with him in a few days.” (p. 146-7)

HSBC ignored the US extensive efforts after 9/11 2001 to prevent funding of terrorist activities. Here is the report’s analysis of this issue (comment in brackets is mine). Christopher Lok, mentioned below, was questioned least week by Levin and he started by apologising, also for his harsh way of speaking to his colleagues; his emails aren’t all very pleasant:

In each case, HBUS and HSBC personnel were aware of the information (and the problems connected to them), but approved or maintained the accounts anyway. When an AML Compliance officer like Beth Fisher declined to approve an account, HSBC personnel found someone else to take her place. In several cases, Christopher Lok, head of U.S. Banknotes, took on the role of relationship manager fighting for account approval. His test for taking on that role depended in part upon how much revenue an account would produce. Al Rajhi Bank’s threat to terminate business with HSBC affiliates also appears to have galvanized HBUS’ renewal of the account.

Another striking feature of these accounts is the fact that a decision by one HSBC affiliate to terminate a relationship with a bank due to terrorist financing concerns did not always lead other HSBC affiliates to follow suit. In the case of Al Rajhi Bank, for example, HBUS terminated the relationship, but HSBC affiliates in the Middle East continued to do business with the bank. One HBUS executive later argued that, since HSBC was already exposed to the reputational risk posed by Al Rajhi Bank through the accounts at other HSBC affiliates, its reputational risk would not increase if one more account were opened. In May 2012, HSBC changed its policy to apply decisions to terminate a client relationship to apply globally to all its affiliates. (p. 240)

The report is also tough on the regulators and their kid glove treatment of a bank that for years and repeatedly desists all attempts by the regulator to push it to follow rules and regulations on money laundering. This reading is yet another reminder that the softly-sweetly approach to regulation has failed. Banks apparently only understand an iron fist and no silk glove.

Senators Carl Levin – an absolute hero of mine for his wit and untiring questioning of the activities of the big banks – and Tom Coburn conducted a hearing last week in relation to the report. The hearing is absolutely fascinating to watch. One of Levin’s star moments is when new managers with the HSBC, hired to remediate the bank’s reputation after this sorry saga, say all the right things as to what needs to be done. Levin says we now need action and not just words – and then reads an almost identical declaration from HSBC… from 1993.

The HSBC case history is bound to have political ramification in the UK. Lord Green was the CEO of HSBC from 2003-2006, when he became chairman of the board until he took office as a minister of trade in 2010. Lord Green can’t play the game of not knowing. He is copied in on emails in the report, ia on Burma – on the list of countries US companies aren’t allowed to do business with – and was the CEO as Mexico drug funds flowed through the bank.

And yet again – following the LIBOR investigations – it seems that US authorities are much more vigilant and virulent in investigating financial malfeasance than corresponding authorities in the UK.

Over the years there have been persistent rumours of money laundering in the Icelandic banks. I’ve heard this from so many independent sides – and yet I’ve never seen any proof of it. But seeing what HSBC was up to – and how easily it could carry it out, in addition to an earlier case regarding ia Wachovia Bank – I do wonder if the reason we don’t know of money laundering in other banks, ia the Icelandic ones, is just because they haven’t been investigated on this point.

Follow me on Twitter for running updates.

Written by Sigrún Davídsdóttir

July 22nd, 2012 at 10:33 pm

Posted in Iceland

One Response to 'Large-scale money laundering – the shocking saga of HSBC'

Subscribe to comments with RSS or TrackBack to 'Large-scale money laundering – the shocking saga of HSBC'.

  1. […] drug lords, dodgy Russian and entities with ties to terrorist organisations (see earlier Icelog here), are more or less in the situation of the house-owner in the story above. This is what’s been […]

Leave a Reply