US documents allege HSBC money-laundering lapses

In April 2003, the Federal Reserve Bank of New York and New York state bank regulators cracked the whip on HSBC Bank USA, ordering it to do a better job of policing itself for suspicious money flows.

Staff in the bank’s anti-money laundering division, according to a person who worked there at the time, flew into a “panic”.

The US unit of London-based HSBC Holdings Plc quickly rallied. It hired a tough federal prosecutor to oversee anti-money laundering efforts. It installed monitoring systems for operations that had grown unwieldy during the bank’s US expansion.

The aim, as HSBC said in an agreement with regulators at the time, was to “ensure that the bank fully addresses all deficiencies in the bank’s anti-money laundering policies and procedures”.
Nearly a decade later, the effort has failed to satisfy law-enforcement officials.

The extent of that failure is laid out in confidential documents reviewed by Reuters that originate from investigations of HSBC’s US operations by two US Attorneys’ offices.
These documents allege that from 2005, the bank violated the Bank Secrecy Act and other anti-money laundering laws on a massive scale.

HSBC did so, they say, by not adequately reviewing hundreds of billions of dollars in transactions for any that might have links to drug trafficking, terrorist financing and other criminal activity.

In some of the documents, prosecutors allege that HSBC intentionally flouted the law. The bank created an operation that was a “systemically flawed sham paper-product designed solely to make it appear that the bank has complied” with the Bank Secrecy Act and is able to detect money laundering, wrote William J Ihlenfeld II, US Attorney for the Northern District of West Virginia, in a draft of a 2010 letter addressed to Justice Department officials.

In that letter, Ihlenfeld compared HSBC unfavourably to Riggs Bank. In 2004 and 2005, that scandal-plagued Washington Bank was fined a total of $41 million after it was found to have violated anti-money laundering laws, and it was acquired by PNC Financial Services.

“HSBC is to Riggs, as a nuclear waste dump is to a municipal land fill,” Ihlenfeld wrote.
The allegations laid out in the Ihlenfeld letter and other documents couldn't be confirmed. It is possible that subsequent inquiries have led investigators to alter their views of what went on inside HSBC’s compliance operation.

HSBC’s US anti-money laundering division - the people charged with ensuring that the bank toes the line of regulators and law enforcement - has experienced high turnover among executives. Since 2005, at least half a dozen overseers have come and gone.

Compliance staff also encountered pushback from bankers eager to maintain relationships with lucrative clients whose dealings raised red flags. The revelations come as HSBC confronts multiple investigations into its internal policing abilities.

The Justice Department, the Federal Reserve, the Office of the Comptroller of the Currency, the Manhattan District Attorney, the Office of Foreign Assets Control and the Senate Permanent Subcommittee on Investigations are scrutinising client activities such as cross-border movements of bulk cash, and transactions linked to Iran and other parties under US economic sanctions, the bank said in a February regulatory filing.

A successful case against HSBC could result in an onerous fine and represent one of the most significant money laundering cases ever brought against an international bank.
It also would draw unaccustomed attention to the challenges governments and financial institutions face in monitoring the trillions of dollars flowing through banks’ back-office operations, flows essential to the daily functioning of the global financial system.

Specifics on the investigations have until now been cloaked in secrecy. The documents reviewed by Reuters for the first time fill in some of the details. Taken together, they depict apparent anti-money laundering lapses of extraordinary breadth. Among them, according to the documents:

*The bank understaffed its anti-money laundering compliance division and hired “gullible, poorly trained, and otherwise incompetent personnel.” In 2009, the OCC deemed a senior compliance official at HSBC to be incompetent - the same executive in charge of implementing a new anti-money laundering system.

* HSBC failed to review thousands of internal anti-money laundering alerts and generate legally required suspicious activity reports, or SARs, on transactions picked up by the bank’s internal monitoring system. SARs are important because they are sent to US law enforcement and scrutinised for leads to criminal activity. In May 2010, the bank’s backlog of alerts was nearly 50,000 and “growing exponentially each month”, according to one of the documents.

* Hundreds of billions of dollars moved unchecked each year through various bank operations because of lax due diligence and monitoring of accounts with foreign correspondent banks, which are financial institutions that rely on US banks for processing services. The bank maintained accounts with “high risk” affiliates such as “casas de cambios” - Mexican foreign-exchange dealers - widely suspected of laundering drug-trafficking proceeds, and some Mexican and South American banks.

* In some instances, “management intentionally decided” not to review alerts of suspicious activity. An investigation summary also says, “There appear to be instances where bank employees are misrepresenting” data sent to senior managers, and where management altered risk ratings on certain clients so that suspect transactions didn't set off alarms.