HSBC lax in preventing money laundering by cartels, terrorists

@CNNMoney July 17, 2012: 1:42 PM ET
Global banking giant HSBC failed to prevent billions of dollars worth of money transfers that Senate investigators believe are linked to drug cartels and terrorist groups, according to a Senate report released Monday.

HSBC executives testified at a hearing on Capitol Hill Tuesday.

NEW YORK (CNNMoney) -- Global banking giant HSBC failed to prevent billions of dollars worth of money transfers that Senate investigators believe were linked to drug cartels and terrorist groups, according to a report released Monday.

The Senate's Permanent Subcommittee on Investigations said London-based HSBC (HBC) failed to review thousands of suspicious transactions and properly vet clients over the past decade.

Among other issues, the report notes that in 2007 and 2008, HSBC's Mexico unit shipped $7 billion in cash to the bank's U.S. affiliate, a volume of shipments that law enforcement officials said could reach that size "only if they included illegal drug proceeds."

HSBC Mexico had a number of high-profile clients linked to drug trafficking, the report says, as well as "a huge backlog of accounts marked for closure due to suspicious activity, but whose closures were delayed."

The report also found that HSBC worked extensively with Saudi Arabia's Al Rajhi Bank, some owners of which have been linked to terrorism financing, according to a CIA report quoted by the subcommittee. Some evidence suggests Al Rajhi's "key founder" was "an early financial benefactor of al Qaeda," the report says.

HSBC's U.S. affiliate supplied Al Rajhi with nearly $1 billion worth of U.S. banknotes up to 2010, and also worked with two banks in Bangladesh that some evidence links to terrorism financing as well.

"From an oversight perspective, the failure of accountability here is dramatic," said Sen. Carl Levin, chairman of the subcommittee.

The Department of Justice is also investigating HSBC over the issue. A DOJ spokeswoman declined to comment, citing the ongoing probe.

The report also said HSBC's U.S. affiliate handled nearly 25,000 transactions involving Iran between 2001 and 2007, despite U.S. sanctions against the country. Other HSBC affiliates making transfers to the U.S. frequently stripped information from the transactions that linked them to Iran in order to evade scrutiny.

Some HSBC executives in the U.S. were aware of this practice as far back as 2001, the report says. An outside review commissioned by HSBC found nearly $20 billion worth of transactions between 2001 and 2007 that may have been subject to U.S. sanctions.

The report came ahead of a hearing by the Senate subcommittee Tuesday that featured testimony from HSBC executives and government officials from the Treasury Department, the Department of Homeland Security and the Office of the Comptroller of the Currency.

Regulators also came in for criticism in the report -- in particular, the OCC, HSBC's primary overseer. The subcommittee said the OCC allowed HSBC's anti-money laundering deficiencies "to fester for years" before finally taking action in 2010, requiring the bank to improve its internal controls.

"Its record of enforcement at HSBC resembles a lapdog rather than the watchdog that we sorely need," Sen. Tom Coburn, the subcommittee's ranking member, said Tuesday.

HSBC said in a statement ahead of the hearing that it "takes compliance with the law, wherever it operates, very seriously."

"We will acknowledge that, in the past, we have sometimes failed to meet the standards that regulators and customers expect," HSBC said. "We believe that this case history will provide important lessons for the whole industry in seeking to prevent illicit actors entering the global financial system."

The bank added that it has beefed up its compliance efforts over the past year, increasing its due diligence requirements for affiliates and devoting more resources to the issue. Speaking at the hearing, HSBC compliance head David Bagley said he planned to step down as part of the reform process, although he will remain at the firm in a different capacity.

The Senate subcommittee noted that HSBC was "fully cooperative" with the investigation, providing documents from around the world beyond what was legally required.

HSBC isn't the first large bank to face scrutiny over money laundering issues from U.S. regulators and law enforcement.

Last month, Dutch bank ING agreed to pay a $619 million penalty for moving billions of dollars through the U.S. financial system at the behest of Cuban and Iranian clients, acts that violated economic sanctions.

In 2010, the former Wachovia Bank paid $160 million to resolve allegations that it lacked robust anti-money laundering measures, allowing Mexican cartels to launder millions of dollars worth of drug proceeds. Wells Fargo (WFC, Fortune 500) bought Wachovia in 2008.

HSBC is also cooperating with investigations into alleged manipulation of the London Interbank Offered Rate, or Libor, though it is not clear whether the bank will be singled out for punishment.

Last month, British bank Barclays (BCS) reached a $453 million settlement on the issue with U.S. and U.K. regulators, and firms including Deutsche Bank (DB), Credit Suisse (CS), Citigroup (C, Fortune 500) and JPMorgan (JPM, Fortune 500) are also being investigated. To top of page

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