Update: The British mega bank HSBC–the latest of the “too big to fail” banks–has managed to escape prosecution for a suite of crimes and missteps that are among the most serious in American law. According to the New York Times, anonymous government sources confessed fears about bringing formal charges, as this would be a “death sentence” for the bank.
Four years after the bank bailout, and after promised to end “too big to fail” from the president, another bank has been let off the hook for their poor management and shoddy decision-making. Senator Carl Levin (D, MI) observed, “the culture at HSBC was pervasively polluted for a long time.”
Establishing that anything is extralegal is a dangerous precedent; it allow banks to think of violations of the law as budget-line issues: if doing something illegal would draw a bigger profit, the bank could just pay the fine and write it off as a cost of doing business. In attempting to protect the economy, the government may have gave license to the banks to destroy it–in light of the increased number of banking scandals in the news.
While the appointment of Senator-Elect Elizabeth Warren (D, MA) to the Banking Committee is, perhaps, expecting too much from one person, it is a step in the right direction towards reform.
See original article below.
(MintPress) – In the latest in a long series of large banks’ prosecutions, HSBC has confirmed it will pay American regulators $1.9 billion after a Senate investigation in the United States revealed the bank was involved in money laundering for “drug kingpins and rogue nations.”
According to Sen. Carl Levin (D, Mich.), chairman of the Senate’s Permanent Subcommittee on Investigations,
“In an age of international terrorism, drug violence in our streets and on our borders, and organized crime, stopping illicit money flows that support those atrocities is a national security imperative…HSBC used its U.S. bank as a gateway into the U.S. financial system for some HSBC affiliates around the world to provide U.S. dollar services to clients while playing fast and loose with U.S. banking rules. Due to poor AML (anti-money laundering) controls, HBUS exposed the United States to Mexican drug money, suspicious travelers cheques, bearer share corporations, and rogue jurisdictions. The bank’s federal bank regulator, the OCC, tolerated HSBC’s weak AML system for years. If an international bank won’t police its own affiliates to stop illicit money, the regulatory agencies should consider whether to revoke the charter of the U.S. bank being used to aid and abet that illicit money.”
The Subcommittee is scheduled to release its findings in a 330-page report at a hearing Dec. 12. This hearing will include the testimony of HSBC officials and federal regulators.
According to the Subcommittee’s summary, in 2010, HSBC was cited by the Office of the Comptroller of the Currency (OCC) for “multiple severe AML deficiencies, including a failure to monitor $60 trillion in wire transfer and account activity; a backlog of 17,000 unreviewed account alerts regarding potentially suspicious activity; and a failure to conduct AML due diligence before opening accounts for HSBC affiliates.” The Subcommittee found that the OCC has failed to undertake a single enforcement action against HSBC in regards to these violations.
The OCC is the national watchdog for all federal saving associations and national banks, as well as the federal banks and agencies of foreign banks. The OCC is also responsible for the Federal Deposit Insurance Corporation (FDIC). The OCC has traditionally dealt with money laundering as a consumer compliance concern, rather than a threat to a bank’s soundness that is worthy of direct and immediate correction.
The Subcommittee focused on five areas:
- HSBC’s American affiliate, HBUS, offered correspondent banking services — or, the servicing of other banks’ business and fiscal transactions; typically, toward acting as a foreign bank’s domestic agent — to HSBC Mexico, failing to treat it as a high-risk client — despite its proximity to major drug cartels, and to casas de cambio (money exchanges) without proper anti-money laundering controls. HBUS also offered U.S. dollar accounts in the Cayman Islands, also without adequate AML controls. HSBC Mexico sent $7 billion in physical U.S. dollars to HBUS for processing from 2007 to 2008..
- HSBC banks outside of the United States knowingly circumvented U.S. laws to block transactions involving drug lords, terrorists and “rogue regimes.” According to one case examined by the Subcommittee, two HSBC affiliates, over seven years, sent nearly 25,000 transactions involving $19.4 billion through HSBC accounts without disclosing the transactions’ links to Iran.
- Despite links to terrorism, HBUS provided access to U.S. dollars and banking services to banks in Saudi Arabia and Bangladesh.
- HSBC cleared and processed $290 million in suspicious U.S. travelers checks for a Japanese bank on behalf of Russians claiming to be in the “used car business.”
- HSBC offered more than 2,000 accounts to bearer share corporations, or corporations in which ownership is not recorded and is attributed to the possessors of the stock certificates. This is problematic because ownership of the involved corporations can be passed to anyone covertly.
HSBC has signed a Deferred Prosecution Agreement for violating the U.S. Bank Secrecy Act, the Trading with the Enemy Act and for other money laundering offenses. This act, akin to probation, spares HSBC the weight of indictment, which would have made it illegal for the U.S. government to conduct business with them. Indictment carried the potential of breaking the bank irreplaceably.
HSBC, or the Hongkong & Shanghai Banking Corporation, is the United Kingdom’s largest bank. It is expected that the bank will reach an agreement with the U.K.’s Financial Services Authority soon.
Stuart Gulliver, HSBC’s Group Chief Executive, said in a press release,
“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 organisation from the one that made those mistakes. 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.
“While we welcome the clarity that these agreements bring, ensuring the highest standards wherever we do business is an ongoing process. We are committed to protecting the integrity of the global financial system. To this end we will continue to work closely with governments and regulators around the world.”
HSBC stated that HBUS has increased its spending on anti-money laundering nearly nine-fold between 2009 and 2011, increased its AML staffing nearly 10-fold between 2010 and 2012, spent over $290 million in remedial measures and clawed back bonuses for a number of senior officials.
Earlier this week, U.K.-based Standard Chartered was fined $100 million from the Federal Reserve and $227 million from the U.S. Department of Justice in regards to charges that the bank violated American sanctions on Iran, Burma, Libya and Sudan. The bank must also pay a settlement of $132 million to the Office of Foreign Assets Control of the United States Department of the Treasury (OFAC). The violations happened between 2001 and 2007 and these fines are on top of an already-paid $340 million to New York’s Department of Financial Services. The Department of Financial Services has accused the bank of hiding 60,000 transactions involving Iran worth $250 billion and paying suspect payments totaling about $670 million.
Manhattan (New York County) District Attorney Cyrus R. Vance, Jr. said in a press release:
“Investigations of financial institutions, businesses, and individuals who violate U.S. sanctions by misusing banks in New York are vitally important to national security and the integrity of our banking system. Banks occupy positions of trust. It is a bedrock principle that they must deal honestly with their regulators. My Office will accept nothing less – too much is at stake for the people of New York and this country. These cases give teeth to sanctions enforcement, send a strong message about the need for transparency in international banking, and ultimately contribute to the fight against money laundering and terror financing.”
According to the press release, Standard Chartered moved more than $200 million through the U.S. financial system on behalf of Iranian and Sudanese clients by “stripping” metadata that would identify the funds as originating from a sanctioned country.
New York County has reached Deferred Prosecution Agreements with ING, fining the bank $619 million in 2012, with Barclays for $298 million in 2010, with Credit Suisse for $536 million in 2009 and Lloyds Bank for $350 million in 2009. Over four years, the five banks have forfeited more than $2 billions for illegal conduct to the City and State of New York.
These two high-profile cases are just the tip of the iceberg. HSBC, the Royal Bank of Scotland, Barclays, Citigroup, Deutsche Bank, JPMorgan and UBS are all under current investigation by the attorney generals of Connecticut and New York and the Serious Fraud Office in the U.K. in regards to the LIBOR-fixing scandal. LIBOR, or the London Interbank Offered Rate, is the interest rate that banks used to lend money to each other. This Tuesday, three men were arrested in the U.K. in regards to the LIBOR scandal. The Commodity Futures Trading Commission imposed a fine of $200 million, the U.S. Department of Justice issued a fine of $160 million and the U.K. Financial Services Authority fined £59.5 million against Barclays for its involvement in the scandal.
The Royal Bank of Scotland and Barclays are also under investigation, along with HSBC and Standard Chartered, for money laundering with the Financial Services Authority, the South Korean Financial Supervisory Service, the Office of Foreign Assets Control, the Securities and Exchange Commission and the Federal Energy Regulatory Commission.
Fixing this mess
The Bank of England and the Federal Deposit Insurance Corporation have drafted a position paper toward making large financial institutions safer without jeopardizing financial stability or public funds. The collapse of a “too large to fail” bank, or a globally active, systemically important, financial institution (G-SIFI), would cause a fiscal crisis, as the collapse of Lehman Brothers did in 2008. The Bank of England and FDIC feel that G-SIFIs, which engage in complex corporate structures, should carry enough capital and debt that can be converted into the working capital needed to make the financial operation safe and stable. The partnership also believes that a bank’s foreign operations should be insulated from national operations, that bank divisions that caused this instability should be shrunk down or eliminated, that culpable management should be let go and that insurances are made to ensure that a bank’s critical services continue to operate in the case of another crisis.
This, in theory, would prevent another government bailout, as — according to the position paper — creditors to the large banks would be forced to absorb the banks’ unsecured debt as equity in time of crisis and become stockholders in the banks.
In reality, it creates a logic loop. Banks can borrow for less because there is an accepted fear that the large banks cannot be allowed to fail. If one creates a system in which all banks are allowed to fail in an attempt to stop a new financial crisis, this artificial lowering of borrowing rates will go away, which would increase the banks’ lending interest rates. This would lead to lowered borrowing rates, a slowing of an already-slowed economy, a possible recession and the very financial crisis that one attempted to avoid when financial deposits drop below needed levels.
The key to ending “too big to fail” is creating an environment in which G-SIFIs cannot destroy an economy with their collapse. This can be done, in part, with the investment instruments banks are allowed to carry. The Dodd-Frank Wall Street Reform and Consumer Protection Act places limitations on the investments that can be entered into by public banks and strengthen consumer advocacy, but areas in which compromises were reached — such as lessened protections against accounting fraud — are the areas where the current suite of financial crimes lie.
Recently, Republicans have came forward, offering support of the act, pending “technical fixes” are accepted. Democrats are skeptical, believing that these ”technical fixes” are fundamental changes to the structure of the law.
Ultimately, reform of the fiscal regime will rely on bipartisanship and a conscious effort on the part of the banks to regain the public trust.