HSBC to Pay Record $1.9 Billion U.S. Fine to Settle Money Laundering Case

By Carrick Mollenkamp & Brett Wolf | December 11, 2012

HSBC Holdings Plc has agreed to pay $1.92 billion to settle a multi-year U.S. criminal probe into money-laundering lapses at the British lender, the largest penalty ever paid by a bank.

HSBC admitted to a breakdown of controls and apologized in a statement on Tuesday announcing it had reached a deferred-prosecution agreement with the U.S. Department of Justice, as was first reported by Reuters last week.

“We accept responsibility for our past mistakes. We have said we are profoundly sorry for them, and we do so again. The HSBC of today is a fundamentally different organization from the one that made those mistakes,” said Chief Executive Stuart Gulliver.

“Over the last two years, under new senior leadership, we have been taking concrete steps to put right what went wrong and to participate actively with government authorities in bringing to light and addressing these matters.”

The bank said it expected to also reach a settlement with British watchdog the Financial Services Authority.

U.S. and European banks have now agreed to settlements with U.S. regulators totaling some $5 billion in recent years on charges they violated U.S. sanctions and failed to police illicit transactions.

No bank or bank executives, however, have been indicted as prosecutors have instead utilized deferred prosecutions.

The deferred prosecution agreement, when detailed by U.S. Justice Department officials later on Tuesday, could yield new information about a failure at HSBC to police transactions linked to Mexico, sources familiar with the matter said. Details of those dealings were reported this summer in a sweeping U.S. Senate probe.

HSBC’s settlement also includes agreements or consent orders with the Manhattan district attorney, the Federal Reserve and three U.S. Treasury Department units: the Office of Foreign Assets Control, the Comptroller of the Currency and the Financial Crimes Enforcement Network.

HSBC said it would pay $1.921 billion, continue to cooperate fully with regulatory and law enforcement authorities and take further action to strengthen its compliance policies and procedures. U.S. prosecutors have agreed to defer or forgo prosecution.

The settlement is the third time in a decade that HSBC has been penalized for lax controls and ordered by U.S. authorities to better monitor suspicious transactions. Directives by regulators to improve oversight came in 2003 and again in 2010.

Last month, HSBC told investors it had set aside $1.5 billion to cover fines or penalties stemming from the inquiry and warned costs could be significantly higher.

Analyst Jim Antos of Mizuho Securities said the statement on Tuesday indicates an extra $420 million for the settlement costs, calling it a “trivial” figure in terms of the company’s book value. “But in terms of real cash terms, that’s a huge fine to pay,” said Antos, who rates HSBC a “buy.”

HSBC shares fell slightly in early London trading to £6.40 [$10.26]. The bank’s Hong Kong listed stock nudged up 0.3 percent to HK$79.70.

HSBC’s settlement is the latest chapter in an embarrassing period for the bank, the result of a lengthy probe into Europe’s biggest bank by U.S. law enforcement agencies as well as a U.S. Senate panel that in July issued a scathing review of HSBC.

ANTI-MONEY LAUNDERING CONTROLS
In its statement, HSBC said it had increased spending on anti-money laundering systems, exited business relationships, and clawed back bonuses for senior executives. It also cited the hiring last January of Stuart Levey, a former top U.S. Treasury Department official, as chief legal officer.

Under a five-year agreement with the Justice Department, HSBC agreed to have an independent monitor evaluate its progress in improving its compliance.

HSBC also said that as part of the overhaul of its controls it has launched a global review of its Know Your Customer files, which will cost an estimated $700 million over five years. The bank has also increased its spending on anti-money laundering by around nine times between 2009 and 2011, it said.

HSBC’s settlement comes a day after rival British bank Standard Chartered Plc agreed to a $327 million settlement with U.S. law enforcement agencies for sanctions violations, a pact that follows a $340 million settlement the bank reached with the New York bank regulator in August.

Such settlements have become commonplace. In what had been the largest settlement until this week, ING Bank NV in June agreed to pay $619 million to settle U.S. government allegations it violated sanctions against countries including Cuba and Iran.

Other banks that have reached settlements over sanctions violations are Credit Suisse Group of Switzerland, Lloyds Banking Group and Barclays Plc in Britain and ABN Amro Holding NV, a Dutch bank acquired by Royal Bank of Scotland Group Plc and a bank consortium in 2007. In the United States, J.P. Morgan Chase & Co., Wachovia Corp. and Citigroup Inc. have been cited for anti-money laundering lapses or sanctions violations.

HSBC’s failings date to 2003, when the Federal Reserve Bank of New York and New York state regulators ordered the bank to better monitor suspicious money flows.

In 2010, a consent order from the Comptroller of the Currency (OCC) ordered HSBC to review suspicious transactions moving through the bank. At the time, the OCC called HSBC’s compliance program “ineffective”.

In 2008, the U.S. Attorney in Wheeling, West Virginia, began investigating HSBC and how a local doctor allegedly used the bank to launder Medicare fraud.

Ultimately, that prosecutor’s office came to believe the case was “the tip of the iceberg” in terms of the suspicious transactions conducted through HSBC, according to documents reviewed by Reuters and reported earlier this year.

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