HSBC’s compliance head stepping down

July 17, 2012 | Last updated on July 17, 2012
6 min read

The chief compliance officer of Britain’s HSBC is stepping down from his position, following the U.S. Senate subcommittee’s investigation into the company’s lax controls.

The bank let Mexican drug cartels launder billions of dollars through its U.S. operation from 2002 through 2009, said the committee in a report released today.

It’s been running a year-long probe into the company’s failure to regulate illegal transactions made through some of its accounts.

As a result, David Bagley, head of compliance for the bank, told a Senate investigations panel during today’s hearing he plans to resign from his current post, but will still remain at HSBC.

Watch the hearing and download witness testimonies.

Bagley has been the head of compliance since 2002—during the period in which the Senate investigation found HSBC’s lack of oversight allowed the bank to be used by drug traffickers and possible financiers of terrorist groups around the globe.

Bagley claims he lacked full authority over the bank’s far-flung affiliates, which each had their own compliance officer. He testified the bank has fallen short of its own expectations and the expectations of its regulators.

He also says he’s told HSBC senior management “now is the appropriate time, for both me and the bank, for someone new to serve as the head of group compliance.”

Bagley and other current and former executives of the bank apologized for lapses but said they weren’t fully aware of illicit transactions flowing through the bank. Senators expressed skepticism, however, that they didn’t know about problems persisting for seven years.

A report by the Senate Permanent Subcommittee on Investigations also found U.S. regulators knew the bank had a poor system to detect problems but failed to act.

“I believe that we made real progress at HSBC Mexico during my short tenure,” said Paul Thurston, who headed HSBC’s Mexican affiliate in 2007 and 2008, earlier today.

However, he added, “We know we should have done this better, sooner.” In his view, the Mexican bank—which HSBC acquired in 2002—had been a fast-growth bank that lacked controls against money laundering.

Sen. Carl Levin, a Michigan Democrat and the subcommittee’s chairman, challenged Thurston. “This is something that people knew was going on at that bank. Why did people allow it to continue?”

“We welcome the apologies. We welcome the commitments,” U.S. Senator Carl Levin (D-Mich.) told the hearing room. But, what the Senate permanent subcommittee on investigations is really hoping to see is a change in culture and behaviour at HSBC.

In his opening remarks, Levin berated witnesses from the bank for lax procedures, including one incident in which bulk travelers cheques with concurrent serial numbers and bearing the same illegible signature for the bearer and casher were cleared by the bank.

He added the subcommittee’s duty is not to prosecute, but rather to investigate. If it finds sufficient problems, the matter will be turned over to government entities that possess the correct authority to move forward.

Levin did say, though, HSBC’s new policies are all good steps in the right direction. What’s missing, he continued, “is accountability for past conduct, [which] is essential.”

He says the bank needs to identify which of its affiliates pose a high risk and put them under close monitoring. The bank should also consider closing the account of its Mexican affiliate and those of banks suspected of providing funding to terrorist groups.

The U.S. Justice Department is conducting a criminal investigation into HSBC’s operations, but declined to confirm the bank is in settlement talks.

For more on the U.S. Senate subcommittee’s investigation, continue reading.

Global banking giant HSBC, and its U.S. affiliate, exposed the U.S. financial system to money laundering, drug trafficking, and terrorist financing risks, says the U.S. Senate’s Permanent Subcommittee on Investigations.

The subcommittee conducted a yearlong investigation into HSBC and has detailed its findings in a 330-page report, which is being released at the hearing currently.

Watch the hearing and download witness testimonies.

The report includes more than 100 documents—including bank records and internal emails—and says Mexican drug cartels laundered money through the bank’s U.S. division from 2002 through 2009.

The hearing began at 9:30 a.m., with statements from U.S. Treasury and Department of Homeland Security officials. Later, HSBC officials and federal regulators will testify. HSBC released a statement saying its executives will offer a formal apology at the hearing.

“We will apologize, acknowledge these mistakes, answer for our actions and give our absolute commitment to fixing what went wrong,” the statement says.

The harshest spotlight is expected to fall on Stuart Levey, who joined the bank in January as chief legal officer, reports Reuters. He had been the Treasury Department’s top official on terrorism finance from 2004 to 2011.

He will be part of the hearing’s third panel, and will make HSBC’s case that the bank has finally fixed its operation to prevent money laundering.

Company shares haven’t dropped yet, but analysts warn the bank may face substantial penalties—and has also found itself in the crosshairs during an election year.

“(The) most important consequence is that the bank is now under the microscope … at a very bad time where banks are used as scapegoats by politicians globally,” analysts at Italian bank Mediobanca said in a research note, adding they expect HSBC to face a $1 billion fine.

The Senate committee investigation focused on HSBC’s key U.S. affiliate, HSBC Bank USA. Globally, HSBC has 7,200 offices in more than 80 countries and reported 2011 profits of $22 billion.

“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,” says Sen. Carl Levin, D-Mich., subcommittee chairman.

He adds, “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.”

Read: Fraudsters are ahead of regulators

The bank claims it changed its senior management last year and has strengthened its compliance with rules to prevent further laundering instances.

“We … recognize that our controls could and should have been stronger and more effective in order to spot and deal with unacceptable behaviour,” the statement claims.

Due to poor AML controls, HBUS exposed the United States to Mexican drug money, suspicious travelers cheques, bearer share corporations, and rogue jurisdictions.

Read: Investors wary of scandal

The bank’s federal bank regulator, the OCC, also tolerated HSBC’s weak AML system for years, Levin says. “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.”

In 2010, HSBC was cited by the Office of the Comptroller of the Currency (OCC), for multiple AML deficiencies. These included: 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, says the subcommittee.

Subcommittee investigators say the OCC failed to take a single enforcement action against the bank over the previous six years, despite evidence of serious AML problems.

The Subcommittee investigation focused on five areas of abuse:

  • Servicing high-risk affiliates
  • Circumventing OFAC safeguards
  • Disregarding terrorist financing links
  • Clearing suspicious bulk travellers checks
  • Offering bearer share accounts, of which HSBC offered more than 2,000 to bearer share corporations despite the high risk of money laundering.

“HSBC’s compliance culture has been pervasively polluted for a long time,” Levin says. “Its recent change in leadership says it’s committed to cleaning house, [and while] that commitment is welcome surely, it will take more than words for the bank to change course.”

Compliance with anti-money laundering laws “is crucial to our nation’s efforts to combat criminal activity and terrorism,” says Thomas Curry, heads of the Office of the Comptroller of the Currency.

The Wall Street Journal reported Monday that HSBC and the Justice Department have been in settlement talks and an accord could be struck within weeks.

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